Macroeconomics Seminar - Gregor Jarosch (Princeton University)

Title:  “Intermediation as Rent Extraction” with Maryam Farboodi, Guido Menzio and Ursula Wiriadinata

Abstract: This paper studies a frictional asset market where intermediation arises purely due to rent extraction motives. In our model, traders differ in their commitment technology, which is why some traders make better deals than others in a bilateral meeting. In equilibrium, agents who are better deal-makers emerge as intermediaries, taking on mismatched asset positions solely because they can unwind them gainfully at future occasions. When agents can invest in their commitment technology, multiple equilibria emerge, with lower welfare in equilibria with more intermediation. If technological improvements lead to a reduction in search frictions, this typically leads to a rise in intermediation and a decline in welfare. A simple transaction tax can restore efficiency by eliminating any scope for bargaining.